The Risk Control Of The Local Government Fundraising Platform Company

The fiscal difficulties and lack of diversity in fundraising faced by the local governmentsince1990’s are caused by the following reasons. First, the market economy in China hasbeen developing rapidly and the process of urbanisation has been accelerating. Second, theadministrative and fiscal power of local government is severely asymmetric after the taxdistribution reform. Third, the Budget Law prohibits the local government issuing bonds. Inorder to resolve the capital shortage in the infrastructure construction of local government andthe prohibition of issuing bonds to raise funds, various local government fundraising platformcompanies appear one after another. In this background and situation, some provinceestablished12local government fundraising platform companies in different areas withdifferent functional orientations on the province level. This thesis uses the TransportationInvestment Group Limited Company as an example to analyse the common risks andproblems according to the specific problems in the example company, in order to raise aseries of corresponding resolutions and advices. In the first part of the thesis, starting fromcases, the specific profile of the Transportation Investment Group Limited Company isintroduced, through which the outstanding problems of the fundraising companies arerevealed. Based on the above problems, from individuality to generality, the main researchquestion is derived. In the second part, a series of basic information of the local governmentfundraising platform companies such as the background information, definition,characteristics, the reasons of their appearance and the basic status. Regarding to the third part,the risks and problems of local government fundraising platform companies in the process oftheir operation and development are further revealed in the following perspectives. First, fromthe perspective of the Security Law, the loan security provided by the local government isfacing the legal risk in reality. Second, the local government fundraising companies usuallydon’t have clear main business and adequate non-current assets, which leads to a hugesolvency risk. Third, the bank is facing certain credit rating risk and post-loan managementrisk as a result of the information asymmetry between the bank and the local government.Moreover, the money borrowed by local government companies usually flows to the cityinfrastructure contribution program of public service program which require a substantialamount of capital, a long construction period and a long loan period, as a result of which the commercial bank has a huge liquidity risk. Furthermore, the low threshold of theestablishment of local government fundraising platform companies results in an inherentdeficiency in their qualification. Lastly, the border between local government fundraisingplatform companies and the government is not clear, which makes it difficult to differentiatethe company and the government, as well as the ambiguousness of the subject of the legalresponsibility. Through inductive analysis of the risks and problems in the thesis, combiningthe examples raised, precisely realising the relevant background and operation mechanism oflocal government fundraising companies, fully comprehending the operation situation of localgovernment fundraising companies, variety of potential risks are revealed. On this basis, inthe fourth part the thesis raises a series of the feasible actions and advices to prevent andcontrol risks aiming at the risks and problems discovered. The legislation progress should beaccelerated and relevant laws regarding to local government fundraising platform companiesshould be perfected. The fiscal and administrative power of local government should bebalanced by further reforming and perfecting the fiscal and tax scheme in our country.Expanding the channels of local government fundraising by establishing and perfecting thelocal government bonds issuing regime. The supervision of local government fundraisingcompanies must be strengthened and the entry administration of the fundraising companiesmust be restricted. The operation administration of local government fundraising platformcompanies must be strengthened. The commercial banks must enhance the administration andsupervision of loan to the fundraising platform. The mechanism of appraising localgovernment achievement must be improved. These six actions and advices form acomprehensive prevention and control scheme in different perspectives. They have significanttheoretical and realistic meanings in the promotion of the regulation and long-termdevelopment of local government fundraising platform companies in our country, theperfection of fiscal and tax system, and the promotion of the role change of the governmentfunction.